Why do you build a DCF analysis to value a company?
Because a company is worth the PV of its expected future CFs.
Compare the implied value by DCF Analysis to the company’s current value to see if it’s valued appropriately.
How do you move from Revenue to FCF in a DCF? (Unlevered & Levered FCF)
Unlevered FCF = EBIT * (1-Tax Rate) + D&A + changes in WC
Levered FCF = (EBIT - Interest) * (1-Tax Rate) + D&A + changes in WC + changes in Debt Principal.
What does the discount rate mean?
The discount rate represents the opportunity cost for the investors - what they could earn by investing in other, similar companies in this industry.
A higher discount rate means higher risk and potential returns, but makes a company less valuable because the investors could have better options elsewhere
How do you calculate terminal value in a DCF? Which method is best?
Multiples Method: apply a terminal ultimate to the company’s EBITDA, EBIT, NOPAT or FCF
Golden Growth Method: assign a “Terminal Growth Rate” to the company’s FCF in the terminal period.
The Gordon Growth Method is better because it suggest a growth rate less than the GDP growth, if you use multiples method, it’s easy to pick a multiple that makes no logical sense because it implies a growth rate too high
Last changed2 years ago